ENGM90007: Project Management Practices

Lecture 04
Risk management – Part 1

Dr Nilupa Herath
2023
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What we will cover today

• Project Risk
• Risk Management Process
• Risk Analysis and Evaluation

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Project Risk
 Risks in projects
• No risk, no reward
– Understanding, prioritisation and controlling is important
• Risks are dynamic (Change with time)
• Change costs and benefits
• Mitigate risks by
– Engineered solutions (risk treatment)
– Insurances
– Contractual allocations

4
Risks in projects

5
Risks in projects

6
Business case – Dimensions of analysis

Strategic
• What is the net value to society (the
social value) of the intervention
Management Economic
compared to continuing with Business
As Usual?
Business • Which option reflects the optimal net
case
value to society?
• What are the risks and their costs, and
Commercial Financial how are they best managed?

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Risk Management
process
 Why Risk Management is important

Risk management provides risk transparency.

Risk management provides Accountability.
Identify the
risks

Risk management reduces risk. Monitor

Examine risk
management
results

Risk management aligns with risk strategy.

techniques

Risk management prepares for risk events.

Risk management monitors risk. Implement
techniques
Select risk
management
techniques

Risk management supports sustainability.

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 Risk standard

AS/NZS ISO 31000:2018

Risk….
An effect of uncertainly on objectives
• An effect is a deviation from the expected — positive and/or Negative
• Objectives can have different aspects (such as financial, health and safety, and environmental
goals) and can apply at different levels (such as strategic, organization-wide, project, product and
process)
• Risk is often characterised by reference to potential events and consequences, or a combination of
these.
• Risk is often expressed in terms of a combination of the consequences of an event (including
changes in circumstances) and the associated likelihood of occurrence

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 Risk Management
Risk management …
• Coordinated activities to direct and control an organisation with
regard to risk

Risk management framework

• Set of components that provide the foundations and
organizational arrangements for designing, implementing,
monitoring, reviewing and continually improving risk
management throughout the organization

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Risk management Principles, framework and
process (After AS/NZS ISO 31000:2018)

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Risk management Principles, framework and
process

Identify the
risks

Examine risk
Monitor
management
results
techniques

Select risk
Implement
management
techniques
techniques

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(After AS/NZS ISO 31000:2018)
 Risk Identification
• Brainstorm techniques
• Check lists (e.g. PMBOK)
• Historic Information
– Probability
– Severity
• Expert Opinion
• Proforma check sheets, e.g. Project profile model
• Detailed statistical and engineering analysis

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Sources of Project Risk
• Business Impact/Benefits
• Project Size
• Organisational impacts
• Technical risk and complexity
• Project Management
• Macro-environment

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Risk in Project Management
Source Example
Client/government/ Bureaucratic delays, changes in
regulatory agencies local regulations
Funding/fiscal Changes in government funding
policies, liaison between several
funders
Definition of project Change in project scope

Project organisation Authority of project manager,

involvement of outside bodies
Design Adequacy to meet need, realism
of design program
Local conditions Local customs, weather windows

Estimating data Relevance to specific project

availability
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Exchange rates, Inflation (Source: Hayes 1986)
 Example: Risks identified in Green buildings

Preliminary and planning Design and construction Handover and operational

• Lack of client interest and • Designers with a lack of GB • Loss of financing or losing
requirements design experience loans for not achieving
• Change policies • Inefficient communication and certification
• Poor estimations of GBs’ long- coordination • Not achieving the expected GB
term return on investment • Risks of green design standard
• Overlooked high initial cost innovation • Green certification cost
• Technical complexity • Inaccurate cost estimation increase
• Unclear contract conditions for • Labour and materials price • GB evaluation standard
dispute resolution fluctuations changes
• Insufficient site investigation • High cost of sustainable • Energy-saving uncertainty
not tailored to local conditions materials and equipment • Unstable operation
• Complex and slow planning • Design changes during performance
approval and permit construction • Challenges for operating
procedures • Unfamiliar technologies, renewable energy systems
materials and construction
processes

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Broad Risks
• Commercial & legal relationships
• Economic
• Human behaviour
• Natural events
• Political circumstances
• Technology/technical issues
• Management activities & controls
• Individual activities
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Areas of project risks

• Scope of work
• Commercial risks
• Third Party risks
• Management risks
• External events
• Insurance

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Risk Register

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Risk Analysis and
Evaluation
Risk Analysis Techniques

• Estimate
• Financial appraisal
• Qualitative method
• Experience
• Quantitative method
– Sensitivity analysis
– Probabilistic risk analysis

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 Risk allocation principles
Party to a contract should bear a risk where: the risk is within the party’s control the party
can transfer the risk (insurance..provided economical) the preponderant economic benefit
of controlling the risk lies with the party in question

• Placement of risk is in the interest of efficiency, planning, incentive & innovation

• If risk occurs, loss falls on that party
• Should not ask for unquantifiable risks to be priced
• Contracts should clearly identify obligations of parties

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The Risk Management Process: Risk Treatment

• Process summary
• Key questions for use in risk treatment
• Techniques for reducing or controlling likelihood
• Techniques for reducing or controlling consequences
• Selecting risk treatment options
• Requirements for documentation

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Risk mitigation treatments

• Reduce risk through management

• Mitigate severity through insurance

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Risk management

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The stages of risk analysis

1. Problem definition
2. Model construction
3. Input variable assessment & solve
4. Model output interpretation
5. Conduct a sensitivity analysis
6. Make decision & implement

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Risk evaluation

• Qualitative technique
• Simplistic technique
• Probabilistic technique
• Real options

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Risk Analysis
techniques
Will be covered in detail by Dr Omar Campos
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Thank you